Budget fails to convince ratings agency

The Chancellor's Budget plans to reduce the fiscal deficit will not prevent a downgrade in Britain's cherished AAA sovereign debt credit rating, it emerged yesterday.

The Standard & Poor's ratings agency reaffirmed its "negative" outlook for the UK and warned that it was reserving its judgement on whether to fully downgrade the UK's rating until after the general election. The Budget has made no difference to its views so far.

S&P has thus maintained its downbeat assessment of the British pubic finances despite the improved news on borrowing delivered by Alistair Darling – down from an officially forecast £178bn to £167bn this year. If there is a downgrade by S&P or by one of the other major ratings agencies, it could have a catastrophic impact on the ability of the British Government to raise funds, on the cost of servicing the national debt and on the balance sheets of banks and insurance companies required to hold gilts as supposedly ultra-safe assets.

S&P said: "In the absence of a strong fiscal consolidation plan, the UK's net general government debt burden may approach a level incompatible with a 'AAA' rating.

"We believe that substantial uncertainty persists with regard to the details of what the current government has indicated will be a largely expenditure-focused fiscal consolidation programme starting next year.

"Moreover, we believe that additional spending measures will likely be required to put the public debt burden on a clear downward trajectory later in the current decade. As a result, we will await further clarity on fiscal policy from the new government following the general election.

"We expect that the institutional framework of Budgets, pre-Budget reports, and spending reviews will enable us to gain additional insight into medium-term fiscal trends by the end of 2010 regardless of the composition of the new government."

The agency revised its outlook to negative in May because of "the lack of a well-specified fiscal consolidation plan". Gilts rose on yesterday's move by S&P, and on encouraging polls for the Conservatives.